RISK ASSESSMENT

Sustained growth dependent on hydrocarbon production and public investment

Activity in Timor-Leste is expected to stabilise in 2016 after contracting slightly in 2015 due to a fall in the oil price. Growth, despite holding firm, will remain constrained by its dependence on the energy sector. The income from the substantial oil and natural gas deposits available in the country, enable it to pay into its sovereign fund, estimated at almost USD 16 billion. These oil revenues are expected to continue to finance investment in infrastructure under the Strategic Development Plan (2011-2030). The investments are likely to be built around four pillars, namely health, infrastructures (telecommunications, energy, water supply and treatment), the growth sectors (agriculture, tourism and petrochemicals) and the institutional framework with the aim of improving the effectiveness of the institutions. The government is seeking to identify new sources of growth, with a view to diversifying productive activities and creating jobs in a country where unemployment affects almost 11% of the population. With this in mind, exploitation of marble and manganese is expected and transport is likely to benefit from substantial investment in infrastructures, including a new international port. However, agriculture's contribution to growth is unlikely to increase, as it is expected to remain mainly focused on food production where productivity is low and vulnerable to weather conditions.

Consumption is expected to benefit from strong domestic demand for electricity and vehicles, sales of which are set to double in 2016, due to a rise in the granting of credit.

Inflation is historically volatile in Timor-Leste, because of the country's exposure to global changes in the price of food and oil. After falling in 2014, inflation is expected to rise in 2016 as domestic demand gradually recovers.

Declining budget and current account surpluses

The budget surplus declined in 2015 following higher spending under the Strategic Development Plan and lower tax receipts linked to oil, but is expected to stabilise in 2016. The government is expected to continue to draw on financial reserves from the oil fund to finance the planned investment. Spending is expected to rise substantially and to be driven mainly by current capital spending to finance the projects, as well as by transfer payments linked to social spending.

Likewise, the current account surplus is expected to remain stable, after declining in 2015 in connection with the worsening trade balance. Exports, mainly of oil, and current transfers are likely to fall slightly in 2016, while imports are expected to grow due to the need for manufactured goods and equipment.

Macroeconomic stability, linked to dollarisation, is limited by the central bank's lack of leeway. Furthermore, financial services are still underdeveloped so provide little support to activity. Moreover, the banking sector has a high proportion of non-performing loans.

Problematic political governance and weak business climate

The country is embarking on its 2nd post-independence decade and is again dealing with political tensions which forced former Prime Minister Xanana Gusmão to step down in February 2015. He was replaced by Rui Maria de Araújo, former health minister and former member of the in the Frente Revolucionária do Timor-Leste Independente (Revolutionary Front for the Independence of Timor-Leste). Before resigning, Mr Gusmão negotiated a government coalition, bringing together the majority and the opposition based on a shared programme.

Due to the lack of political opposition within the government, civil organisations will continue to be the only opposition voice on policy and budget matters.

The effectiveness of the government's actions is still called into question by the population and there is still significant poverty. While most Timorese still live in the countryside and depend on agriculture, the government has still not succeeded in enlivening the private sector. Youth unemployment is, as a consequence, very high.

Externally, Timor-Leste prioritises relations with its two neighbours, Indonesia and Australia, and integration in Southeast Asia. As a partner of ASEAN, the country has renewed its wish to become a full member in order to benefit from the growth in inter-regional trade.

In a country marked by significant corruption and where the geographic and ethno-linguistic fault lines and politics between the extreme-east, the west coast and centre are sharply drawn, the risk of a resurgence in social tensions is high and the business climate remains very difficult (the World Bank's Doing business report ranks the country 173rd out of 189 countries).